With tax season here, many people are looking forward to the possibility of a big refund, and pondering the best way to spend the extra cash. A recent GOBankingRates survey revealed some interesting differences in how people plan to use their tax refund check — including those between men and women, age groups and income levels.
Ultimately, there is no right or wrong way to use a tax refund. However, if you're pondering how to use your tax refund, there are ways that you can use that money to your greater advantage. Here are 10 of the most popular things to do with your refund.
1. Pay Off Debt
Among women who were polled, the most popular use of a tax refund is to pay off high-interest debt. That’s a smart plan, according to Jared Snider, a financial advisor at Exencial Wealth Advisors.
“For the average person, using a tax refund to pay down outstanding unsecured higher-interest debts, like credit card debts, is a great way to use the extra cash,” he said. Nearly 30 percent of women said they plan to use the refunds to pay off debt, compared to about 25 percent of men.
2. Put the Money in Savings
Women and men are about equally likely to plan on saving their tax refunds, but that view varies somewhat among age groups. People age 65 and up, and those age 25 to 34 are the most likely to plan on saving their refund, according to the GOBankingRates survey.
“I would look at using a tax refund to ensure that folks have an emergency fund for expenses," said Snider. "At least three months' [worth] is important."
3. Put Toward a Vacation
After a hard year of work, many people are simply ready to settle down and take a nice vacation. Sometimes cash can be a little tight, though. That’s where a hefty tax refund can come in handy.
The third most popular use of a tax refund, according to the survey, is putting the money toward a vacation. Nine percent of people choose this option. Setting a budget for vacation, and sticking to it, can help you make sure you don't overspend and potentially go into debt.
4. Major Purchase
A big tax refund can also be used to help fund the down payment on a major life investment, like a house or a car. In the survey, 5 percent overall said they planned to put their refund toward a major purchase.
However, men were a little more likely (4.7 percent) to use their refund this way than women (4.2 percent). People with incomes from $50,000 to $99,000 were slightly more likely (5.6 percent) to use their refund this way, compared to either people making less than $50,000 (4.1 percent) or $100,000 to $149,000 (2.6 percent).
5. Splurge on a Purchase
Another popular way to use a tax refund is to splurge on some small luxury you have been wanting for a while. From a new TV to shoes or a purse, the little things in life can make a big difference. Men were more likely than women to use their tax refund this way, according to the survey.
Younger people, especially in the 18 to 24 age bracket (7 percent), were more likely than people 65 and up (2 percent) to splurge on a purchase with their refund. Finally, those with a lower income were much more likely to splurge on something for themselves than those in higher income brackets.
6. Save for Kids' Education
One of the arguably better investment choices for kids today is planning ahead for their college education. Funding a 529 plan for a child's education can be a good way to use tax refund money in a smart, tax-efficient way, said Snider.
In fact, Snider said that decision is one of the most common he has seen. “My clients typically use tax refunds for Roth contributions or funding 529 contributions. Though paying off car loans is also a popular choice," he added.
7. Fund a Roth IRA
If you have just gotten a tax refund, then there is a good chance that Uncle Sam and the IRS are already on your mind. While there is no way to avoid the reach of the tax man altogether, you can make smart choices that will help for the future.
One popular way to use a tax refund and save on taxes is with a Roth IRA contribution. Saving a tax refund into an after-tax Roth IRA can be a great option for starting to accumulate investing dollars without having to worry about paying taxes on the gains from those investments for now. A $2,700 investment in a Roth IRA at a 7 percent interest rate will be worth more than $10,000 in just 20 years, according to Forbes.
8. Upgrade Your Home
Your refund check might not be large enough to let you buy a new home, but you probably can upgrade your existing one. There are a number of upgrades that can be done on a budget. For as little as $200 or so, you can repaint interior rooms, for $200 to $300 you can replace bathroom and kitchen faucets or for $500 you can update light fixtures with newer ones, according to estimates on HomeAdvisor.com.
For those with a little more money to spend, outdoor landscaping — including shrubs, bushes, and mulch — can be bought for less than $1,000. Perhaps best of all, in addition to making you feel better about your home, any of these upgrades can help if you decide to sell your house down the road.
9. Invest for the Future
Paying down debt and saving for the future are often cited as common ways to use a tax refund, but another good choice goes beyond just saving. Investing funds from a tax refund can be a great way to start putting your capital to work and earn a return that is significantly higher than what you could earn on a simple savings account.
For example, although investment returns vary over time, on average stocks have historically earned 11.41 percent annually, according to data from the Federal Reserve Bank of St. Louis. For people looking for more safety, 10-year treasury bonds have earned an average of 5.16 percent annually since 2006.
10. Upgrade Your Insurance
Insurance is not always exciting, but when you need it, it’s of vital importance. From covering legal expenses in car accidents, to helping protect your home from a flood, fire or hurricane, insurance can mean the difference between just a bad day and financial ruin for many people.
If you have standard insurance policies, for a little extra dough from your tax refund, you can upgrade those policies to provide more coverage in the event of a disaster. A comprehensive insurance policy might not be as much fun as a new TV, but it definitely can help provide more peace of mind.